Supplementing Domestic Mitigation and Adaptation with Emissions Reduction Abroad to Face Climate Change

In this paper we focus on a long-term dynamic analysis of the optimal adaptation/mitigation mix in the presence of a pollution threshold above which adaptation is no longer efficient. We account for accumulation in abatement capital, greenhouse gases, and adaptation capital in order to better capture the arbitrage between abatement and adaptation investments. Pollution damages arise from the emissions due to the country consumption but also from the emissions of the rest of the world (ROW). A pollution threshold is then introduced, above which adaptation is no longer efficient. We obtain that if this threshold is lower than the steady-state level of pollution, there is no way for the modelled economy to avoid it. In particular, such a situation will appear if the ROW’s emissions are high. We then show that CDM may be a means to avoid a pollution threshold above which adaptation becomes of no use.     

A portfolio approach to climate investments: CAPM and endogenous risk

Is there a role for investments in climate change mitigation despite low expected return? We use a model of intertemporal expected utility maximisation to analyse this question. Similar to the capital asset pricing model (CAPM) the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio, but in contrast to the classical CAPM we admit the fact that economic and environmental systems are jointly determined, implying that environmental risk is endogenous. Therefore, investments in climate change mitigation may reduce risk via self-protection and self-insurance. If risk reduction is accounted for in cost–benefit evaluations, climate investments may be justified despite low expected return. These aspects of climate investments are not, however, communicated via standard cost–benefit analyses of climate policy. Optimal climate policy may therefore be more ambitious than previously considered.     

Optimal Investment in Urban Drainage: A Framework for Cost-Benefit Analysis

This article addresses some basic issues (including distributional weights, discount rates, and the value of life) in the cost-benefit analysis of urban drainage and provides a framework for the estimation of the optimal amount of investment for flood mitigation. This involves: (i) estimating the expected total damage from flooding in present-value terms before flood mitigation; (ii) deriving the reduction in expected total damage as the average recurrent interval of flooding increases; (iii) estimating how this interval increases with the amount of investment in flood mitigation; and (iv) choosing the optimal investment by equating marginal benefit and marginal cost. The framework is also applicable to other accident or damage mitigation investments and some issues discussed are relevant to all types of cost-benefit analysis.     

Adaptation to Climate Change: Commitment and Timing Issues

We study the impact of timing and commitment on adaptation and mitigation policies in the context of international environmental problems. Adaptation policies present the characteristics of a private good and may require a prior investment, while mitigation policies produce a public good. In a stylized model, we evaluate the impact of strategic commitment and leadership considerations when countries with different attitudes towards environmental cooperation coexist. We obtain equilibrium abatement and adaptation levels and environmental costs under partial cooperation for various timing and leadership scenarios. Crucially, global environmental costs suffered by countries are found to be greater when adaptation measures can be used strategically.     

A Good Opening: The Key to Make the Most of Unilateral Climate Action

In this paper we argue that when a subgroup of countries cooperate on emission reduction, the optimal response of non-signatory countries reflects the interaction between three potentially opposing factors, the incentive to free-ride on the environmental benefits of cooperation, the incentive to expand energy consumption, and the incentive to adopt the cleaner technologies introduced by the coalition. Using an Integrated Assessment Model with a game-theoretic structure we find that the equilibrium abatement of the coalition composed by OECD countries would be moderate, in line with the Pledges subscribed in Copenhagen, but increasing. The mitigation strategy would consist of investments in energy R&D and deployment of cleaner technologies with high learning potentials. International knowledge and technology externalities would facilitate the diffusion of cleaner technologies in non-signatory countries, offsetting the free-riding incentive and reducing their emissions. If the OECD group curbs emissions beyond the optimal equilibrium level, reaching reduction rates between 40 and 45 % below 2005 levels in 2050, the benefits of technology externalities would no longer compensate the effect of lower fossil fuel prices. Our results suggest that a moderate unilateral climate policy could induce a virtuous behaviour in non-signatory countries and that policies promoting the international transfer of technologies and knowledge could represent an effective complement to mitigation targets.     

Domestic environmental policy and international cooperation for global commons

The paper analyzes the strategic behavior of several countries engaged in capital accumulation, pollution mitigation, and environmental adaptation in the context of an environmental common good. Both cooperative and non-cooperative strategies are discussed. The non-cooperative strategy is a dynamic game in which each country makes its own environmental decision following the open-loop Nash equilibrium. The cooperative social planner problem assumes an international environmental agreement in force. The non-cooperative and cooperative solutions are compared in the symmetric case of two countries and extended to several identical countries. It is shown that the non-cooperative strategy in multi-country world leads to over-production, over-consumption, over-pollution, and over-adaptation.     

Global warming and economic externalities

Despite worldwide policy efforts such as the Kyoto Protocol, the emission of greenhouse gases (GHG) remains a negative externality. Economic equilibrium paths in the presence of such an uncorrected externality are inefficient; as a consequence, there is no real economic opportunity cost to correcting this externality by mitigating global warming. Mitigation investment using resources diverted from conventional investments can raise the economic well-being of both current and future generations. The economic literature on GHG emissions misleadingly focuses attention on the intergenerational equity aspects of mitigation by using a hybrid constrained optimal path as the “business-as-usual” benchmark. We calibrate a simple Keynes-Ramsey growth model to illustrate the significant potential Pareto improvement from mitigation investment and to explain the equilibrium concept appropriate to modeling an uncorrected negative externality.     

Climate change and economic growth: An intertemporal general equilibrium analysis for Egypt

This study advances the state of the art in country-level computable general equilibrium analysis for climate change impact and adaptation analysis by incorporating forward-looking expectations. The analytic framework is used to explore the long-run growth prospects for Egypt in a changing climate. Based on a review of existing estimates of climate change impacts on agricultural productivity, labour productivity and the potential losses due to sea-level rise for the country, the model is used to simulate the effects of climate change on aggregate consumption, investment and income up to 2050. Available cost estimates for adaptation investments are employed to explore adaptation strategies.The simulation analysis suggests that in the absence of policy-led adaptation investments, real GDP towards the middle of the century will be 6.5% lower than in a hypothetical baseline without climate change. A combination of adaptation measures, that include coastal protection investments for vulnerable sections along the low-lying Nile delta, support for changes in crop management practices and investments to raise irrigation efficiency, could reduce the GDP loss in 2050 to around 2.6%.Further work along these lines for developing countries in climate change hotspot regions deserves a high priority on the research agenda in economic modelling.     

Mitigation and adaptation strategies for the control of biological invasions

Biological invasions are recognised to be a problem of growing severity. Human pathogens, weeds or pests in terrestrial systems and dominant alien species in freshwater or marine aquatic systems all impose significant costs in terms of forgone output or costs of control in every major system. Like many of the other environmental consequences of globalisation, biological invasions require that decisions be taken under uncertainty. Decision-makers in such circumstances have to choose between two main strategies: mitigation and adaptation. This paper characterises invasive species problems in terms of the properties of the stochastic processes they induce. It considers how mitigation and adaptation strategies may be modelled, and identifies the conditions in which each approach may be efficient and effective.     

Time substitution for environmental performance: The case of Swedish manufacturing

We extend recent advances in time substitution modeling to a directional distance function framework, in order to examine the environmental performance of firms in Sweden’s pulp and paper industry for the years 2002–2008. Our data allow us to estimate the optimal reallocation of environmental investments, expenditures and energy use to simultaneously maximize production output and minimize emissions in the years immediately before and after the implementation of the European Union Emissions Trading Scheme. We find some evidence of overall productivity decline when considering both emissions and output objectives, due primarily to technological decline, and that cumulative dynamic inefficiency outweighs static inefficiency. A comparison of optimal investment with observed investment indicates that firms could have improved their performance by reallocating environmental investments to early periods and production-oriented investment to later periods.     

Free-Riding and Cooperation in Environmental Games

This paper examines the negotiation of an international environmental agreement in which different countries determine the (nonenforceable) promises of investment in clean technologies to be included in the agreement. Furthermore, it analyzes countries' optimal investment in emission-reducing technologies, considering that, in addition to the utility that a country perceives from an improved environmental quality, it is also concerned about the relative fulfillment of the terms specified in the international agreement either by itself or by others. I show, first, why countries may prefer to shift most promises of investment in clean technologies to other countries, despite the fact that these promises are usually nonenforceable by any international organization. Second, I determine countries' optimal investments in these technologies, and analyze how their particular investments depend on how demanding the international agreement is, and on the importance that countries assign to each others' relative fulfillment of their part of the treaty.     

Policy implications of potential conflicts between short-term and long-term efficiency in CO2 emissions abatement

This paper shows that, under certain conditions (including path dependence and lock-in), policies and measures leading to a cost-effective GHG emissions mitigation in the short term may not allow reaching long-term emissions targets at the lowest possible cost, that is, they might not be cost-effective in the long term. The reason is that, in a situation where currently expensive technologies have a large potential for cost reductions through learning effects and R&D investments, the implementation of incentive-based mitigation policies such as taxes or tradable permits will encourage the adoption and diffusion of currently low-cost abatement technologies, but might not be enough to make attractive the diffusion of expensive ones, which is a necessary condition for these technologies to realise their cost-reduction potential through the aforementioned effects. A simple model and a numerical simulation are provided to show this possible conflict between static and dynamic efficiency, which points out to the need to combine different instruments, some aiming at short-term cost-efficiency (such as incentive-based environmental policy) and others at encouraging dynamic cost reductions (such as technology/innovation policy).     

低碳农业发展核心目标:减缓和适应气候变化

减缓和适应是人类应对气候变化行动中两种相辅相成的措施。中国农业在应对气候变化中,减缓和适应同等重要:一方面,农业在减缓气候变化中具有独特的作用;另一方面,农业适应气候变化比减缓气候变化更为现实的迫切。积极发展低碳现代农业实现减排增汇,中国农业生态系统可以作为一种非常重要的固碳增汇措施,纳入全球CO2减排措施中去。中国低碳农业在减缓和适应气候变化中具有巨大潜力。     

Adaptation,mitigation and risk-taking in climate policy

The future consequences of climate change are highly uncertain and estimates of economic damages differ widely. Governments try to cope with these risks by investing in mitigation and adaptation measures. In contrast to most of the existing literature, we explicitly model the decision of risk averse governments on mitigation and adaptation policies. We also consider the interaction of the two strategies in presence of uncertainty. Mitigation efforts of a single country trigger crowding out as other countries will reduce their mitigation efforts. This may even lead to lower mitigation on the global scale. In contrast, a unilateral commitment to large adaptation efforts benefits the single country and can reduce the global risk from climate change at the expense of other countries.     

An investment contest to influence environmental policy

In an investment contest for environmental policy, polluters and victims of pollution invest in an increase of their marginal benefits of pollution and environmental quality, respectively. These investments influence time-consistent environmental policy. Investments will exceed their optimal level. The more victims there are, the lower aggregate investment, the lower payoffs for the victims and the higher payoffs for the polluters. The more polluters there are, the higher aggregate investment and the lower payoffs for polluters and victims. Asymmetries between polluter and victim result in less overinvestment and bias environmental policy in favour of the less productive side.     

Higher Pollution Damage, More Lenient Environmental Policies?

In a standard static setup, optimal environmental taxes are increasing in expected pollution damage. With irreversible investments and new information about environmental damage becoming available over time, we show that this result also holds if damage in the high-damage scenario rises or the probability of high damage increases. However, if damage in the low-damage scenario increases, current environmental taxes should decrease if firms face sufficiently similar abatement costs.     

Long run trends in energy-related external costs

This paper considers how energy-related external costs change through time. It focuses on one of the key periods in the history of energy. After a period of declining coal prices and soaring consumption which fuelled the Second Industrial Revolution, the nineteenth century British economy was externalising the social costs of energy production and consumption on a massive scale. Rising from 25% in the 1820s, an estimated 60%-70% of the average social costs of coal were externalised in the 1880s, imposing damages close to 20% of GDP. The eventual decline in air pollution concentration (around 1900) occurred fifty years later than was broadly socially optimal. This experience highlights the evolution of the demand for and supply of environmental quality in the context of economic growth, and the nature of related market and government failures, implying the necessity for adaptation rather than encouraging mitigation. This experience may offer lessons for climate analysis and policy-making.     

Adaptation and Mitigation in Global Pollution Problems: Economic Impacts of Productivity, Sensitivity, and Adaptive Capacity

This paper studies the influence of productivity, pollution sensitivity, and adaptive capacity on optimal mitigation and adaptation in a two-country global pollution model. We investigate the effects of changes of these parameters on the allocation of emissions, adaptation expenditures, and welfare. In our analysis we distinguish between cooperative and non-cooperative behavior. Our findings imply that unilateral improvements in productivity and adaptive capacity have strategic significance and do not necessarily lead to mutual welfare improvements. They raise the emissions not only in the country where the technological improvement takes place, but also globally. An improvement in global welfare is guaranteed only under cooperative behavior with respect to emission and adaptation choices.     

A Real Options Approach to Abatement Investments and Green Goodwill

In this paper we adopt the green goodwill argument as to why firms voluntarily invest in abatement capital. We investigate the effects on the abatement investment decision of changes in uncertainty about future green goodwill, competitor abatement investments, regulations, etc., using a real options framework. Our results indicate that increased uncertainty about consumers' willingness to pay for green products in the future discourage voluntary abatement investments. The model also suggests that voluntary abatement investments are promoted by an increased threat of regulation and competitor abatement investments. Furthermore, the benefit-cost ratio of the abatement investment project, at the point where it is optimal to invest, is independent of what regulatory regime (stringent or lenient) the firm operates in. We also conclude that despite the fact that voluntary abatement investment exists, there may still be room for environmental policy.     

Climate Change Mitigation with Technology Spillovers

We explore the implications of an increase in clean technology spillovers between developed and developing countries. We build a game of abatements in which players are linked with technology spillovers determined by an initial choice of absorptive capacities by developing countries. We show that, within a non-cooperative framework, the response of clean technology investments in developed countries to an increase in cross-country technology spillovers is ambiguous. If the marginal benefits of these additional abatements are not sufficiently high, developed countries have a strategic incentive to decrease investments. Such a strategic response jeopardizes the initial effects of an increase in technology spillovers on climate change mitigation and decreases the incentives for developing countries to enhance their absorptive capacities.